1. Oil and the Global Economy
After falling from $103 to $100 a barrel on Tuesday, NY oil remained in a trading range between $98 and $100 for the remainder of the week, closing at $100.57 on Friday, In London Brent crude traded some $15 a barrel higher, closing the week at $115.84. Trading last week was dominated by bad news about the US economy which suggests that US demand will be lower, and better news about the EU's and the IMF's bailout of Greece, which strengthened the euro thereby putting upward pressure on oil prices. The euro touched $146.3 on Friday, the highest level since early May. At present the oil markets are driven by a balance between rising euro and declining propects for US oil consumption.

Expectations about US economic recovery have changed markedly in the last two weeks after reports showing US manufacturing slipping and unemployment increasing. Factories in the US cut payrolls for the first time in seven months and employment by government agencies, retailers and hospitality companies fell.

US crude inventories rose by 2.8 million barrels the week before last and gasoline inventories rose by 2.5 million barrels.

OPEC will meet on Wednesday to decide on a production increase in the face of numerous warnings that the oil market will become much tighter in the second half of this year. It is an open question as to whether any increase in OPEC's formal production quota has any meaning at this time. Most OPEC members have been producing as much as they can for many months and the Saudis, who may have several million b/d of reserve production capacity, have been very guarded on the production issue in the wake of the unrest in the Middle East.

Surveys by the financial wire services say OPEC production increased by 355,000 b/d in May from April's production. According to Dow Jones, the Saudis increased production by 450,000 b/d to 9 million b/d. One observer notes that much of the Saudi increase in oil production is due to higher domestic demand to support air conditioning during the very hot summer months and is not offsetting the loss of Libyan exports.

Most of the pre-OPEC conference comments from various insiders are suggesting that there will be an increase in the formal production quotas although a consensus of analysts expects the quotas will remain unchanged. Whether a increase in quotas translates into exports to meet increases in demand expected in the 2nd half of the year remains to be seen.

Disturbances in the Middle East continued last week. Stepped up NATO attacks on government forces in Libya seem directed at bring the fighting to an end in the foreseeable future. The demonstrations in Yemen and Syria continue to grow worse with increasing numbers of demonstrators being gunned down by security forces in Syria and Yemen¡'s President being forced to leave the country for medical treatment in Saudi Arabia after an attack on his palace. Two months of protests in Yemen have left its economy on the verge of collapse with shortges of fuel, water, electricity, and food in many areas.
The real issue, however, remains in the Gulf where protests against the Kuwaiti government took place for the third straight Friday and tensions between the Saudis and Iran are increasing over the sectarian fighting in Bahrain. Unlike the other uprisings, the one in Baharain is a sectarian conflict that could eventually spread into Iraq and Saudi Arabia threatening large amounts of oil production.

On Monday the Keystone pipeline which carries Alberta oil to the Cushing, Oklahoma depot was shutdown after a leak at a pumping station. On Thusday the US government ordered the pipeline remain shut until it is satisfied that all safety concerns have been addressed. The pipeline is a sensitive issue because of an application to extend it to the Gulf and because it runs under some prime farm land and an important acquifer. Should the pipeline remain closed for an extended period, the lack of Canadian oil arriving at the NYMEX delivery point at Cushing may affect the spread between the NY and London futures oil contracts.

Gasoline futures in NY continued to trade around $3 a gallon after fallining from above $3.50 around the beginning of May. The AAA reports that currently the average gasoline price in the US is $3.77 a gallon, down about 20 cents from $3.98 a month ago.

2. China
Last week Beijing released an index of manufacturing for May showing a small decrease from April, but above what analysts had been expecting. This suggests that China's economy was still growing robustly last month by global standards despite efforts by authorities to rein in inflation and spreading power shortages. To deal with the growing power shortage, the government raised the prices that power companies are allowed to charge commercial electricity consumers, but kept the price for domestic consumption at current levels in order not to exacerbate retail price inflation. The move is expected to encourage power producers to step up generation of power.

Whether the move will have much effect remains to be seen as Chinese electricity consumption is expected to pick up in June and remain high for the rest of the summer. The government is reporting that domestic fuel stocks are falling as more industries are turning on diesel-fired generators to keep production lines moving. The State Grid Corporation predicted that this summer's power shortage will be worse than in 2004.

The drought in Central China is now said to be the worst in 60 years, and in Hunan province the papers are calling the situation the worst in 100 years. In several provinces there is inadequate drinking water and river traffic has been suspended. In 30 percent of Hunan's reservoirs the water level is too low for irrigation and some 700,000 hectares of farmland have been affected. On Saturday, China's Premier, Wen Jiabao, presided over an anti-drought seminar and called for stronger efforts to combat the situation.

Despite the dire pronouncements coming out of some of the key agricultural regions, China's Agriculture Ministger Han Chjangfu announced that China will have a bumper harvest of wheat and rapeseed this summer. Wheat is mainly grown in the north which only a few weeks back was reported as having a major rain deficit. Nonetheless, winter wheat production is expected to grow for the 8th straight year thanks to an increase of 200,000 hectares from the 2010 harvest of 27.7 million hectares. In 2010 China's grain output rose by 2.9 percent to 546 million tons.

Looking further ahead, however, China's environmental and water situations remain serious, and some of its megaprogects to control the environment are running into unforeseen consequences. Last week, China's top environment officials held a press conference to say that China's biodiversity was declining and that the country side was becoming more polluted as industries move to more rural areas.

Chinese planners admitted last week that they had failed to foresee the impact of the massive Three Gorges dam on lakes and rivers downstream. Water levels in the lower Yangtze and two of China's largest lakes have dropped dramatically because of all the water stored behind the dam. The planners, however, see the 84 billion KWh the dam produced last year as outweighing the damage that has been caused. Last week the government felt impelled to announce that the dam was not responsible for the drought which would have happened anyway.

Quote of the week"We don't want the West to go and find alternatives [to our oil]"
-- Prince Alwaleed bin Talal, nephew of Saudi King Abdullah

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

Accoring to the IEA, carbon-dioxide emissions hit a record high last year, dimming the prospects of limiting the global temperature increase to two degrees Celsius. (5/30,#6)

Iran's oil production may fall to 2.7 million b/d within five years unless $150 billion is invested in its energy sector. Sixty billion dollars would have to be financed by foreign investors despite the financial sanctions; another 50 billion dollars would come from the oil ministry; and the last $40 billion would be invested by Iranian banks. (5/30,#8)

The Israeli government has instructed US-based Noble Energy not to resume drilling at the Leviathan natural gas field until it provides details about an earlier mishap. Production at Leviathan is expected to begin around 2017, and it is unclear if this delay would affect that schedule. (5/30, #10)

Egypt says it will not resume natural gas exports to Israel, Jordan and Lebanon until it secures a pipeline that has been repeatedly bombed–allegedly by Bedouin tribesmen seeking a share of the revenue. The new government in Cairo is seeking to renegotiate the natural gas treaty with Israel to obtain higher prices so it is not clear that "securing the pipeline" is a real issue. (6/4,#10,11)

Tensions between China and Vietnam increased last week as each accused the other of violating its sovereignty in the oil-rich South China Sea. PetroVietnam accused the Chinese of sabotaging its oil exploration vessels. (5/30,#19)

The state-run Indian Oil Corp. says it will have to start borrowing $1.3 billion each month unless it is compensated for the losses it incurs by selling its oil products at low government-set prices. (5/30#20)

Ottawa has admitted that it deliberately left out data from a manadatory climate change report to the UN showing a 20 percent increase in greenhouse gas releases from its oil sands industry in 2009. (5/30, #24)

Greenpeace activists temporaily boarded an oil rig off the coast of Greenland in a attempt to disrupt summer drilling there by Cairn Energy. They were eventually arrested and taken away by police from Greenland. (5/30,#25)

Germany plans to phase out all of its 17 nuclear power plants over the next 10 years. Few details were given as to how Berlin intends to make up for the electrical power shortfall while meeting its climate-protection goals–but larger imports of Russian natural gas combined with more emphasis on wind, solar power and biofuels is likely. (5/30,#26,27)

In early 2008 Libya's soverign-wealth fund gave Goldman Sachs some $1.3 billion to invest in currencies and other complicated trades. Goldmans promptly lost 98 percent of the money amidst that year's financial collapse. To make good the losses, Goldmans offered to Libya the chance to become one of its largest shareholders, but the negotiations broke down and nothing more has been done about the lost money. (5/31,#8)

Pressure from European natural gas consumers is growing to scrap the 40-year-old system that links the price of natural gas to that of the London's Brent crude. Brent has increased by 23 percent in the last year while natural gas prices have languaished due to a glut. (6/1,#5)

Nigeria's parliament once again failed to pass an oil industry reform law. The lack of a modern law concerning the granting of leases and regulation of the oil industry is holding back foreign investment and hampering growth of the industry. (6/1,#9)

Sales of new cars, trucks and buses in Japan sank 38 percent in May from last May, as production after the March 11 earthquake limited vehicle supplies. Sales of Toyotas dropped by 57 percent, Honda by 35 percent and Nissan by 16 percent. (6/1,#17)

Falling river levels in northern and eastern Europe could force the shutdown of numerous nuclear power plants for lack of cooling water. This would likely increase the demand for oil, coal, and natural gas to make up for the shortfall in power production. (6/1,#25)

Libya's oil minister, Shokri Ghanem defected in Rome from his government, but it uncertain whether he will join the rebel government in Eastern Libya. Ghanem said there is a shortage of fuels in Western Libya and it is unclear if supplies are sufficient for more than a few weeks. Long gas lines are reported in Tripoli. (6/2, #9)

Venezuela's oil minister said his country will continue to ship 1.2 million b/d to the US despite the sanctions Washington has imposed by Caracas for sending gasoline to Iran in violation of the various sanctions. After the rather mild sanctions were imposed various Venzuelean officials including President Chavez had talked about slowing oil shipments to the US in retaliation. (6/2,#13)

Thousands of young activists rallied in Kuwait for the third straight Friday to demand the removal of the Prime Minister, thereby pushing the country closer to political turmoil. Speakers called on the emir to put an end to the intra-family feuding amongst the al-Sabah family which has ruled the country for the last 250 years. (6/4,#14)

US officials have met with representatives of the Spanish oil company Repsol which is planning to start drilling off the coast of Cuba later this year. The Spaniards assured the US that it will adhere to all of the US rules and rugulations required for drilling in US waters. (6/4,#16)

Over the strong objections of environmentalists, the Brazilian government has given permission to start construction of the world's third largest hydroelectric dam on the Xingu river in the Amazon rain forest. The project will supply jobs for 41,000 workers and will generate 11,200 megawatts, 11 percent of Brazil's requirements. The dam will also flood 198 square miles and displace 16,000 people. (6/4, #14)

The US offshore drilling regulator (BOEMRE) said it is taking steps to streamline the application process in an effort to process permits faster. The effort comes as BOEM is being criticized by some industry groups and Republicans in Congress for taking too long to issue drilling permits, (6/4, #22)

A new report by the state labor department says that drilling for shale gas in Pennsylvania has created 48,000 new jobs in the last month. (6/4, #25)